KRChoksey Research recommends a "Buy" rating on Archean Chemical Industries Ltd. (ACI), setting a revised target price of Rs 890, reflecting a 32.6% potential upside from its current market price (CMP) of Rs 671. Despite challenges in Q2FY25, including weather-related disruptions and inventory losses in industrial salt, ACI's strategic investments in high-growth areas such as bromine derivatives, zinc bromide batteries, and silicon carbide technology position the company for significant long-term growth. With a focus on expanding its value-added portfolio, ACI is expected to transition from a commodity-centric business to a specialty chemical leader.

Key Investment Highlights

1. Q2FY25 Performance Analysis

Revenue Decline: ACI reported a 17% YoY decline in revenue, primarily driven by a 19% reduction in industrial salt revenue, which constitutes 62% of overall revenues.
Profitability Impacted: Adjusted PAT fell by 15% YoY due to lower volumes and profitability. The sharp 74% decline in reported PAT was attributed to a Rs 40.2 crore inventory loss caused by cyclonic disruptions.
Bromine Segment Resilient: Bromine revenue grew by 11% YoY, supported by higher domestic demand, even as export pricing faced pressure.
2. Strategic Initiatives in Advanced Technologies

Zinc Bromide Batteries: ACI's investment in OffGrid Energy Labs introduces cutting-edge energy storage technology to its portfolio, enabling potential royalty income from global licensing opportunities.
Silicon Carbide (SiC) Expansion: The partnership with Classic Wafer Fab Ltd. opens avenues in the growing semiconductor market, especially for applications in electric vehicles and renewable energy.
3. Bromine Derivatives: A Growth Catalyst

The bromine derivatives business is expected to gain momentum in H2FY25, with strong domestic demand and expanded production capacity targeting 20,000 tonnes in FY25 and 25,000 tonnes in FY26E.
By integrating specialty products like clear brine fluids (CBF) and PTA synthesis, ACI is diversifying its revenue streams beyond core commodity chemicals.

Operational Challenges and Outlook

1. Industrial Salt Disruptions

Cyclonic conditions disrupted transportation logistics, reducing quarterly export volumes to 7.5 lakh tonnes.
Management has guided a recovery in H2FY25, with an annual target of 4.5 million tonnes, despite possible weather-related variances.
2. Margin Pressure

EBITDA margins contracted to 31% in Q2FY25 from 33% YoY, reflecting lower absorption of fixed costs. However, improved bromine realizations and cost rationalization are expected to stabilize margins in subsequent quarters.

Valuation and Financial Projections

1. Revised Target Price

KRChoksey has adjusted its forward P/E multiple to 20x (previously 19x), reflecting ACI's shift towards a value-added product portfolio.
The target price of Rs 890, based on a revised FY26E EPS of Rs 45, indicates a strong potential upside of 32.6%.
2. Financial Trajectory

Revenue is projected to grow at a CAGR of 28% between FY24 and FY26E, driven by bromine derivatives and new product launches.
PAT is expected to increase at a CAGR of 31% during the same period, supported by operational efficiencies and higher-margin products.

Stock Performance and Recommendation

1. Historical Performance

Over the past 12 months, ACI has traded within a 52-week range of Rs 838 to Rs 516, reflecting volatility in the broader market and operational challenges.
2. Investment Recommendation

KRChoksey reiterates a "Buy" recommendation, citing the company’s strategic pivot towards high-growth and high-margin segments. Investors are advised to accumulate the stock at current levels for long-term gains.

Bottomline

Archean Chemical Industries' robust strategy, marked by diversification into advanced materials and a shift towards specialty chemicals, underscores its long-term growth potential. Despite near-term challenges, the company's investments in bromine derivatives and advanced technologies like zinc bromide batteries and SiC devices position it to capitalize on emerging opportunities in energy storage, petrochemicals, and semiconductors. At a CMP of Rs 671, ACI represents a compelling opportunity for investors seeking exposure to India's evolving chemical sector.